F 09420010120134020 PP T 07

Course : F0942 Management Control System
Year
: 2013-2014
Planning and Budgeting
Slide 8.3
Chapter 8:
Planning and Budgeting
Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007
Slide 8.4
Financial results controls
Three core elements:

Financial responsibility centers
The apportioning of accountability for financial results
within the organization
Formal management processes

Planning & budgeting to define performance expectations
and standards for evaluating performance
Motivational contracts
To define the links between results and various
organizational incentives
Slide 8.5
Planning and budgeting
Produce written plans that specify:

Where the organization wishes to go?
How it intends to get there?
What results should be expected?
Purposes of the planning and budgeting process?
To engage in longer-term thinking.

To achieve coordination (top-down, bottom-up, sideways).
To enhance management control.
To arrive at challenging but realistic performance targets.
Slide 8.6
dispersed at all organizational levels
Increasingly specific, detailed, short-term, and
Planning cycle
Strategic
Planning
Programming
Capital
Budgeting
Operational
Budgeting
Relatively broad processes of thinking

about the missions, goals and strategies.
Normally a top-management process.

Specification of specific action programs
to be implemented over the next few years
and specification of the resources each
will consume.
It involves many more people at different
organizational levels (top-down/bottom-up).
Short-term financial planning.

Budgets match the organizations
responsibility structure.
Emphasis on quantitative data.
Slide 8.7
Characteristics of a budget
It is usually stated in monetary terms.
It generally covers a period of one year.
It contains an element of management commitment,

i.e., the managers agree to accept the responsibility
for attaining the budgeted objectives.
The budget is approved by an authority higher than

the budgetee.
Once approved, the budget can be changed only

under specified conditions.
Periodically, actual financial performance is compared

to budget and variances are analyzed and explained.
Slide 8.8
Budgeting and management control
Budgeting involves setting targets which are often

used later as standards against which to evaluate
performance results controls
Planning and budgeting processes involve formal

reviews of plans and include the actions that are
felt to be good for the organization to take
action controls
Planning and budgeting processes serve to get

information needed for decision making to the
right managers personnel controls
Slide 8.9
The budget preparation process

Budget Committee
ss
e
nc
ua
G
of
os
op
Pr
4. Approval
s
ne
eli
uid
Budget
Department
et
dg
Bu
al
Bottom-Up
I
1.
l
itia
In
2.
3. Negotiation
Top-Down
Business Managers
The budgeting process takes about four months in most firms.

Slide 8.10
Example: Johnson & Johnson

year
profit
plan
1997
1998
1999
2000
2005
1998
1999
2000
2001
2002
1999
2000
2001
2002
2003
2000
2001
2002
2003
2004
2005
2005
2005
2005
2005
2010
2010
2010
2010
2010
2003
2004
2004
2005
2005
2006
2010
2010
2015
2015
2nd year
forecast
5/10-yr. Plans
Slide 8.11
Types of financial performance targets
Model-based (engineered)/historical/negotiated
Internally/externally-derived
Information asymmetry
Target costing
Benchmarking
Fixed/Flexible
Should managers be held accountable for achieving their
plans regardless of the business conditions they face?
Relative performance targets.
Slide 8.12
Budget participation
Top-down/bottom-up budgeting
The budgetee is both involved in and has influence
over setting the budget.
Leads to better acceptance of budget targets, and hence,
commitment to achieve them.
Is an effective way of information sharing:
Corporate priorities and constraints
lower-level insights about business potentials and risks.
But, slack, bias, conservatism, lack of budgeting
experience.
Slide 8.13
Motivation/Performance
Budget target difficulty
Easy
Goal Difficulty
Impossible
Slide 8.14
Budget target difficulty (Continued)

In theory (lab experiments):
Probability
Good targets are about 25-40% achievable.
Target
Performance
Slide 8.15

In practice (field research):
Probability
Targets are about 80-90% achievable.
Target
Performance
Slide 8.16
Probability
Good vs. ineffective management teams
Target
Performance
Slide 8.17
Probability
Low vs. high uncertainty
Target
Performance
Slide 8.18
Challenging but achievable
To minimize dysfunctional management actions.

Myopic behavior, data manipulation
To increase managers commitment to budget targets.
To reduce the cost of organizational interventions.

Management-by-exception
To protect against the cost of optimistic revenue

projections.
Over-commitment of resources
To create a winning atmosphere and positive attitude.

Slide 8.19
What is a good budget target?

Purpose of Budgeting
Motivation
Planning
Coordination
Cost control
Evaluation
Target Difficulty
Conservative
Best guess
Optimistic
Target should be after-the-fact assessment of what could

have been accomplished, not any of the three choices listed.

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Course : F0942 Management Control System

Planning and Budgeting

Financial results controls

Three core elements:

Formal management processes

Planning and budgeting

Produce written plans that specify:

Purposes of the planning and budgeting process?

To engage in longer-term thinking.

dispersed at all organizational levels

Increasingly specific, detailed, short-term, and

Relatively broad processes of thinking

Normally a top-management process.

Short-term financial planning.

It is usually stated in monetary terms.

It generally covers a period of one year.

It contains an element of management commitment,

The budget is approved by an authority higher than

Once approved, the budget can be changed only

Periodically, actual financial performance is compared

Budgeting and management control

Budgeting involves setting targets which are often

Planning and budgeting processes involve formal

Planning and budgeting processes serve to get

The budget preparation process

The budgeting process takes about four months in most firms.

Example: Johnson & Johnson

Types of financial performance targets

Budget target difficulty

Budget target difficulty (Continued)

Good targets are about 25-40% achievable.

Budget target difficulty (Continued)

Targets are about 80-90% achievable.

Budget target difficulty (Continued)

Good vs. ineffective management teams

Budget target difficulty (Continued)

Low vs. high uncertainty

Challenging but achievable

To minimize dysfunctional management actions.

To increase managers commitment to budget targets.

To reduce the cost of organizational interventions.

To protect against the cost of optimistic revenue

To create a winning atmosphere and positive attitude.

What is a good budget target?

Target should be after-the-fact assessment of what could

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